Life insurance is an essential component of a sound financial strategy. More than just ensuring your family’s financial security when you get ill and unable to work or die unexpectedly, they exist to give you peace of mind.
Whether you are investing in whole life or variable life insurance, know that they have living and death benefits. For instance, they provide a safety net to cover both short-term and long-term expenses.
How life insurance may benefit the policy owners?
Life insurance products have two components that can be utilized for financial reasons. These are the death benefit and cash value.
Death benefit refers to the payout that the beneficiary is entitled to. It can be a person or an organization that you—the policyholder—will name at the time of application. The beneficiary will receive it as a lump sum payment.
Also, death benefits are not taxable, so you will receive it in full amount. Unless the policyholder structured how the death benefits (e.g., 50% at the time of death and 50% after a year).
Furthermore, some insurance companies allow the beneficiary/ies to structure how they would want to receive the death benefit aside from the default lump sum. It can be paid on installment.
Cash value is the savings component of the life insurance policy. This is equal to the sum of money built over time but is held in the account. This accumulates through devoting a certain percentage of the premiums toward investments, usually mutual funds. The amount credits the policy based on how the stocks perform.
Cash value also earns interest, albeit modestly.
Some life insurance products also have riders that can be utilized for short-term needs and emergencies.
Life insurance benefits
Below are some of the life insurance benefits you never know existed.
1) Paying for final costs
Death benefits from life insurance could help your family in paying for the final expenses incurred after you pass away. These include medical bills that your health insurance did not cover and funeral or cremation costs. Other financial obligations are mortgage or automotive loans and credit card bills that can be also covered by the proceeds your family will receive.
2) Replacing income
Aside from paying off outstanding debts, life insurance benefits also help replace the income your family depends on when you met your sudden demise. The money they will receive can help cover essential expenses for at least six months until they can fully recover financially.
3) Withdrawing earnings
Some life insurance policy products are investment-linked, with earnings that you can without affecting their enforceability. These are the insurance policies that have a cash value that you can withdraw once the minimum threshold amount is met. These are the accumulated interests or mutual funds investment dividends.
4) Borrowing from the earnings
Yet another life insurance benefit is the possibility of taking a loan against the said cash value. If you would no longer need the policy or you have too many policies and want to convert it into cash, this is also possible through surrendering the policy. You can also do so if you have an emergency and needs immediate cash.
5) Covering children’s expenses
Like your personal expenses change throughout the years, children’s expenses grow as they age. Sending them to quality schools could be the biggest of these expenses more so at the college level. You can think of life insurance as an additional coverage essential for your kids’ educational expenses.
6) Acting as an inheritance
Or an additional inheritance. Some policyholders actually intend their death benefits as part of their inheritance. After all, this is easy with life insurance-the chosen heir can be named as the beneficiary. In this way, the policyholder ensures that the death benefits will be received by that person as intended.
7) Replacing the spouse’s income
If both of you are working and one of you died, this would take a toll on the living needs of the rest of the family. For instance, when you have very young kids, you might be relying on the nanny’s help. Becoming a single-income suddenly would mean letting go of the necessities such as the household staff.
8) Having retirement money
If you outlive your life insurance, then you can simply channel the benefits to your retirement fund. You may have built the fund over time, and yet there are unexpected expenses along the way that could have exhausted the fund or limit you from prioritizing it. The cash value, for instance, can be used as your retirement fund instead.
9) Buying a business partner’s shares
If you entered a business partnership and he or she died unexpectedly, you must have enough money to buy his or her shares. This is where life insurance benefits can also help. With this, you will be able to shoulder your partner’s part of the obligations without closing or selling off the company. It is also advisable that the partner must make a similar investment.
10) Continuing charitable donation
Insurance companies allow naming beneficiaries after the charitable institutions. For the policyholders, it means continuing with the philanthropic goals even if he or she is no longer there physically.
Is life insurance for me?
Before you reap any of the benefits, you need to invest in a life insurance product. You might be asking if life insurance is for you or not. Let these things below guide you in deciding whether it is worth your time or not.
You have kids. The living expenses of households with kid(s) are higher than those without. Life insurance benefits can cover educational expenses as well as other expenses that come with growing up.
You have debts. Debts do not usually go away when you die. The family you left behind will be responsible for those debts. The life insurance payouts can take that burden away from them.
You take care of others. For breadwinners, a sudden loss of household income will affect their lifestyle more so if you have children, elderly, or a person with a disability (PWD) in the family.
If you fall into any of these categories, you need a life insurance policy.
The question now is: How do you find affordable life insurance?
Affordability is a relative term. When it comes to insurance products, it can become subjective as well. Life insurance costs vary from one insurance company to another.
During the underwriting process, the insurance company will evaluate your insurability based on age, health, and occupation. There are specific ways to still lower your costs. Consider these additional tips when buying life insurance.
- Compare life insurance products. You have to shop around and don’t buy the first insurance policy offered to you. See what policies are available to you. Read reviews. It would be wise to learn about the stocks market and mutual funds if you are considering an investment-linked policy.
- Read the terms and conditions before you sign anything. Do not sign anything unless you are completely sure what you are getting yourself into. Ask for clarifications if something sounds off to you.
- Know how much coverage you need. This one is tricky, but you need to think about those people who depend on you. How much money do you think they need to live comfortably even without your income? Think about long-term financial obligations as well that your family would have to pay otherwise.
- Keep yourself healthy. Health is an essential factor when looking for a life insurance product that is appropriate for your needs. Less risk means paying less monthly premiums. Quit smoking now because smokers tend to pay higher premiums than non-smokers.
- Buy a policy while still young. Aside from health and lifestyle, age is also an important consideration. Do not put investing in life insurance off because the longer you put it off, the higher the monthly premiums will be.
Again, the affordability of the life insurance policy. Bear in mind that what you need to pay for has several benefits while you are still alive as when you die. The bottom line is living with a sense of financial security and, thus, peace of mind.
Life insurance is a sensitive topic mainly because it touches the topic of death. However, the life insurance benefits—both living and death—are immense that you cannot just brush off the idea of investing in one.
Perhaps, it should no longer be about whether life insurance is for you or not. Rather, it should be asking yourself which insurance product to avail. Remember that when you think about your future, you are also actually thinking about the future of your loved ones. You don’t want them to suffer when you are gone, right?
Indeed, it pays to be prepared.
There is no escaping death. It is only a matter of time. Like the unknowability of when you will die, investing in life insurance means protecting your loved ones from the unknowable and uncertain. This will help them get through an otherwise challenging time of loss.